- The Washington Times - Sunday, September 21, 2008

ANALYSIS/OPINION:

COMMENTARY:

The 2008 presidential election is in its home stretch and guarantees a historic finish. Yet as important as 2008 appears, the 2012 election could be far more so. Even though we do not yet know its participants, we have good insight into its defining issue, the economy. And 2012 is likely to produce an even more agitated electorate and more significant outcome than this November’s.

The economic obstacle course grows longer by the day. Housing and banking crises plus high gas prices have combined to slow growth to a standstill. Certainly America has seen worse. In 1980, America faced far higher inflation, an actual recession, and a much more severe gas crisis.

However that was a generation ago. For today’s Americans distant memories offer no comparative comfort to current problems. They are taking it hard and are hardly unwilling to take it out on their elected officials.

A recent AP/IPSOS poll put President Bush’s approval at 28 percent and Congress’ at just 18 percent. Only 16 percent said the country was headed in the right direction.

For those seeing light at the end of this tunnel, be forewarned: It’s another trainload of trouble coming. The next administration not only inherits today’s problems, they come coupled to more. The housing and banking crises are far from done. The same goes for high gas prices, which will not fall far because of high global demand. To these, add inflation. Consumer prices recently recorded their largest jump in 17 years. As a result, higher interest rates are likely coming. For an already slow economy with low rates, higher inflation and interest rates are particularly worrying.

Next is the prospect of higher taxes. Ranging from relatively “small fry” temporary provisions to “whoppers” - alternative minimum tax and the 2001 tax cuts’ expiration - the potential for greatly increased taxes looms. Without preventative legislation, the Congressional Budget Office estimates taxes as a percentage of gross domestic product will increase from 18.8 percent last year to 20 percent in 2012 - slightly more than this year’s 1 percent tax cut considered necessary to stimulate the current weak economy.

Those arguing tax increases will be prevented must remember the pay-go mindset likely to demand offsetting tax increases elsewhere. Either way, the tax burden grows on an economy still facing serious growth obstacles.

All these events will disproportionately impact the middle class. CBO estimates that unless otherwise stopped, income taxes as a percentage of GDP increase from 8.5 percent in 2007 to 9.8 percent in 2011 and 10.2 percent in 2012 (just under the all-time record of 10.3 percent set in 2000).

Who pays income taxes? Middle-class Americans and up. According to a recent study by Congress’ Joint Economic Committee, 97 percent of all income taxes are paid by the top 50 percent of income tax filers - those with incomes starting at $32,000.

Having seen their home’s value fall - their largest asset and likely retirement security (and the first Baby Boomers begin turning 65 in 2011) - the middle class then have been hit by soaring gas prices. Next comes inflation’s effect, increasing the prices they pay across the board. Then come rising interest rates that squeeze any debt accumulated to forestall the effects of the earlier economic hits. Finally, much higher taxes top it off.

All this cuts into their security in a serrated sequencing like descending stairs. The banking and housing crises, and high gas prices spill over into 2009. Inflation and accompanying interest rate hikes will follow. In 2010, the debate over the 2001 tax cuts’ expiration begins, in 2011 they expire, and in 2012, their first bill comes due - just in time for the 2012 presidential election.

Fueled by all these factors, it is difficult to see the economy avoiding recession over the next four years. And impossible to not see a middle class “poverty effect” - the reverse of the “wealth effect” that earlier rode up with the value of the middle class’ assets. If the electorate is already seriously dissatisfied - with the current economic problems yet to dissipate and a host of new ones still to come - then, “you ain’t seen nothing yet.”

How seriously the electorate takes the economy is historically clear. By 2012, only four incumbent presidents will have lost re-election in the last century: Herbert Hoover in 1932, Gerald R. Ford in 1976, Jimmy Carter in 1980 and George H.W. Bush in 1992. Each had a recession (or Depression) in the year of, or the year before, their re-election bid.

The economy is undoubtedly America’s most potent political force - and it has apparently grown more so - three of the four presidential incumbent defeats occurred in just the last 36 years. The economy spurs the electorate to make dramatic political changes. Two of those four incumbent defeats produced the two political giants of the 20th century - Franklin D. Roosevelt and Ronald Reagan. Undoubtedly 2008 offers its own potential for this, but it is far from the end. It is just the beginning of what could be an extraordinarily volatile four years in American politics.

J.T. Young served in the Department of Treasury and the Office of Management and Budget 2001-04 and as a congressional staff member 1987-2000).

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